Today In People Who Don’t Need Your Capital

I’ve sort of resisted writing about Apple’s capital return thingy because, yeah, that basically makes sense, they have more money than they know what to do with and more coming in each day, so their choices are pretty much (1) give some of it back, (2) find something super-awesome to spend it on, (3) find something dumb to spend it on, or (4) engage in weird experiments in macroeconomics and/or exponential growth where they end up having more money than there is in the world. I don’t have any super-awesome ideas to spend it on (and also I trust Apple to know better than I do what it’s good at doing); spending it on dumb things seems … dumb; and I don’t think the weird experiments will work though you never know! That leaves “give some of it back.” So you can say something like “yeah this makes sense” or “I would’ve done it slightly differently,” or you can go and say something silly. Like:

Gregory Milano of Fortuna Advisors, which advises Fortune 500 companies on maximizing their market value, did some quick math. Milano considers buybacks to be like any other investment a company can make. Buybacks must offer a good return in order to be deemed a smart use of capital. That is, if a company buys its stock at $10 a share and it rises to $12 next year, it’s earned a 20% “return on investment” for shareholders. Because the average business’s capital costs run 10% a year, between debt and equity expenses, most companies should seek buybacks to return more than 10% a year if they want to build shareholder profit.

In Apple’s case, returns on capital are extraordinary. The tech giant earns around a 40% return on its operating capital, far exceeding its capital costs. So what’s a good hurdle rate, or minimum rate of return, for its buyback? Milano thinks a 20% “return on investment” is fair.

For the buybacks to deliver that return, Milano says Apple’s stock price will have to rise 128% to $1,368 over the next five years. For a meager 10% buyback return, the stock needs to hit $984 in five years.

Can the stock reach those heights?

You make the call! I will not be making that call because feh. Here is my model of Apple:

(1) People entrust it with money to build stuff
(2) If it can build stuff at a 40% IRR, it should go do that
(3) If it can build stuff at a 39% IRR, it should probably go do that

(4 – 40) If it can build stuff at an X% IRR, 39>X>1, dealer’s choice

(41) If it can put money into bank accounts at a 1% IRR, it should probably give that money back to shareholders who can, y’know, also put it in the bank at 1%, or do something else.

You can interpret the present situation in various ways but you’d have to at least consider the possibility that, loosely speaking, Apple has captured the projects where risk-adjusted X > 1%, and is kind of out of ideas that are better than parking its cash in the bank. Because otherwise it would be doing those ideas instead of parking its cash in the bank.* Part of why Apple’s returns on capital are extraordinary is because it invests its money in really good projects. If it doesn’t have any more of those, it makes sense to give some of the money back. In other words, your hurdle rate in deciding whether to return capital can’t be your cost of capital. (Right?)

But you can’t really blame Mr. Milano of “Fortuna Advisors, which advises Fortune 500 companies on maximizing their market values,” because holy shit he advises Fortune 500 companies on maximizing their market values!** How could that be a goal? And the answer is, you know how: managers like to have high market values. One way to reduce your market value would be to give cash back, though I have a feeling it won’t work here.

Meanwhile in another part of town a man did not attend a meeting:

Facebook Inc. chief executive Mark Zuckerberg doesn’t expect to play a hands-on role selling the social network’s initial public offering to analysts, one Facebook executive told Wall Street analysts Monday.

The company is also planning to pay a below average fee to underwriters of the stock sale.

On Monday, Mr. Zuckerberg skipped a meeting of analysts and bankers at Facebook’s Menlo Park, Calif., headquarters, according to people familiar with the meeting. In response to a question about his absence, the company’s chief financial officer, David Ebersman, said Mr. Zuckerberg preferred to focus his time on developing the service rather than play a role with such analysts, the people said.

Senior Facebook executives, however, haven’t made any decisions yet on the role Mr. Zuckerberg will play in a so-called roadshow to sell the company’s shares to investors, or the larger IPO process, said one person familiar with the matter.

Obviously the stronger move here would be to attend the meeting, but stare out the window the whole time and comment on the weather, and then some snotty analyst would be all “Mr. Zuckerberg, do I have your full attention?” and YOU KNOW THE REST. But this sends the same message I think which is “this process has the minimum amount of my attention.***”

Which makes sense. Facebook doesn’t need the money from its IPO, except hilariously to pay taxes incurred by its IPO, and it’s actually borrowing money to do that. (Presumably because L+100 money is cheaper than expected returns on Facebook stock.)

You can see why this sort of thing gets people mad. The notion that companies are supposed to be run for the benefit of shareholders, which I guess makes sense as a first approximation, sometimes grows into the less sensible notion that the most important thing for a CEO to do is to think thoughts about his shareholders. Apple and Facebook have the luxury of mostly not having to play to that perception – Apple because it’s the biggest company in the galaxy and also because it’s ridiculously profitable so shareholders are happy even without a lot of touching and stroking, Facebook because Facebook Facebook Facebook Facebook and also because it doesn’t really want their money. So they wind up treating their capital like they’d treat other inputs to their enterprise: using only as much as they need, returning what’s not being used, and delegating its management to specialized executives rather than making it the main focus of their CEO’s time. It all makes total sense if you’re not too romantic about the role of shareholders. It just doesn’t do much for market-value consultants and capital markets bankers.

Can Apple’s stock reach $1,368? [Fortune]
Facebook’s Zuckerberg Skips Analyst Meeting [WSJ]

* I mean, really loosely speaking. Not really 1%. But it’s probably safe to say that all the guaranteed 20% IRR projects are budgeted for in the four hundred kajillion dollars they’re hanging on to.

** He probably doesn’t really. To be fair, Fortuna’s principles seem a bit more plausible than that, although also confessedly “postmodern,” which, okay. But presumably he’s about shareholder value maximization, not like literally “how to increase market cap.”

Also, I’m generally being unfair to him. He’s probably discussing buybacks as opposed to dividends, not buybacks as opposed to keeping the cash, and there the argument is better though not necessarily a slam-dunk. I’m more in the price-insensitive school of buybacks myself but the other side has its points. So, sorry Mr. Milano. I was just tickled by that specific number. Will they make $1,368? Will they not? The suspense will kill me for five years.

*** “And, incidentally, of my fees.”

(hidden for your protection)
Show all comments

82 Responses to “Today In People Who Don’t Need Your Capital”

  1. Steve says:

    "Because the average business’s capital costs run 10% a year"

    We ain't RIM motherfucker.

  2. DingALing says:

    I wish they'd man the fuck up and say why Zuck really missed the meaning: He doesn't understand how to run a business and leaves it to the CFO so he can go back to playing Farmville.

  3. Cubes says:

    I may have chuckled at a Matt post. Someone's learning the ropes.

  4. Guest says:

    What's the appeal of prison shoes?

    – Guy who has never been to prison but watches a lot of Cops

  5. Im_a_Dude says:

    didnt read the post, but love those Adidas slides!

  6. Guest says:

    At Ford in the 1950's they used to pay their employees a good wage and give them discounts on Ford cars. Thought was: folks who worked on cars all day would be more likely to plow excess dough back into the cars and they'd want buy the newer models more often.

    – Guy who doesn't really get corporate finance but likes a good story

  7. Guest says:

    I don't get it. If I'm the CEO I'm not sitting on the floor. That plebe in the back of the photo is.

  8. Rut-roh says:

    Never a good sign when Matt is the first post of the day

  9. Avid Reader says:

    Not related to Matt, but I do think he may be the most incisive financial blogger out there! Once you get past his various ethical blind spots, of course…Oh, and his, like, affected writing style.

    Anyway, good stuff as always!

  10. guest says:

    I'd buy all my H1's hookers.

  11. john ferraiuolo says:

    If you want to bet on the NCAA, please contact Chris Armada @ 646-556-2785 – Solid bookmaking for 10+ years – BofA employee with solid backing. Reports to John Ferraiuolo – Barclays management – solid backing as well.

  12. Huésped says:

    I never thought I would agree wholeheartedly with Matt. Do people who actually get paid in this industry understand that Apple isn't desperate for the capital to fund the next four iPad-quality products, or understand the idea of marginal returns?

  13. Marry Brown says:

    <img src=>I think he's good luck, of course, there are certain strength<img src=>

  14. Guest says:

    Why doesn't Apple repatriate and pay taxes on all this money? Greed I guess is the only explanation. It is surely not for business reasons.

  15. The Sword says:

    Matt "Fucking Tolstoi" Levine……..can we get your articles in the abridged format where you actually just write enough to get the point across????!!!! Jesus! I'm tired of reading a novel to get a short one-pager worth of enjoyment…..

  16. Anon says:

    Um, what? The share buyback is offsetting dilution due to employee stock options. This isn't a buyback, as much as it is a glorified salary expense. The whole practice of a buyback is horrible for shareholders… The best time to buyback shares is when a company's stock price is low, but how many distressed companies have cash hoards to afford the buybacks AND right the ship from an operating perspective? In practice, share buybacks are always authorized when the company has plenty of cash on its balance sheet and its stock price is high because it's operating effectively.

    It's always justified as "offsetting dilution" which is just saying "we're locking in the cost of these options at the worst possible time." Return the cash to shareholders and let them determine the efficient way to allocate their capital; if we think it should be reinvested in the company, we'll have no problem buying more shares.

    In conclusion, fuck "market capitalization consultants."

  17. hmmmm says:

    Wow, one of the best articles I've read on here. Well done, Matt. I'm proud.

  18. UFO says:

    So let me simplify:

    Zuck basically has almost zero actual need for financing because he's got a highly profitable cash business and this frustrates bankers.

    Is that about right?

  19. Adoro me mostrar peladinha na internet cam

  20. This domain is fabulous. I have read every post almost so far. I cant believe how delicious your writing actually are. I would like to meet with you. Please contact me when you can. Much praise

  21. Learn More says:

    I really enjoyed your article. That is nice when you read something that is not only informative but entertaining. Outstanding.

  22. A person necessarily lend a hand to make seriously articles I’d state. That’s the incredibly first time I frequented your online page and thus far? I amazed with the research you made to make this actual post extraordinary. Excellent activity!

  23. You actually concluded a variety of fine points here. I performed a search on the issue and found that nearly all people have the same opinion with your blog.

  24. Hi there! Do you know if they make any plugins to assist with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good gains. If you know of any please share. Cheers!

  25. Hello! Quick question that’s entirely off topic. Do you know how to make your site mobile friendly? My site looks weird when viewing from my apple iphone. I’m trying to find a template or plugin that might be able to resolve this issue. If you have any suggestions, please share. Appreciate it!

  26. more info says:

    The very core of your writing whilst sounding agreeable in the beginning, did not sit properly with me after some time. Someplace throughout the sentences you actually were able to make me a believer but just for a very short while. I however have got a problem with your jumps in assumptions and you might do well to help fill in those gaps. In the event that you can accomplish that, I could definitely be amazed.

  27. Do you mind if I quote a few of your articles as long as I provide credit and sources back to your website? My blog site is in the very same niche as yours and my visitors would truly benefit from a lot of the information you provide here. Please let me know if this okay with you. Appreciate it!

  28. Nice post here, thought I could learn more from but I can learn more from here.

  29. over here says:

    Please let me know if you’re looking for a author for your blog. You have some really good posts and I believe I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some content for your blog in exchange for a link back to mine. Please blast me an email if interested. Regards!

  30. My coder is trying to convince me to move to .net from PHP. I have always disliked the idea because of the expenses. But he’s tryiong none the less. I’ve been using WordPress on a number of websites for about a year and am nervous about switching to another platform. I have heard excellent things about Is there a way I can import all my wordpress posts into it? Any kind of help would be greatly appreciated!

  31. Hola! I’ve been following your web site for a long time now and finally got the courage to go ahead and give you a shout out from Porter Tx! Just wanted to mention keep up the good work!

  32. Hello! I’ve been following your site for some time now and finally got the bravery to go ahead and give you a shout out from Dallas Tx! Just wanted to mention keep up the fantastic work!

  33. This can be such a good web-site that genuinely cought my focus at when. I genuinely like the content material but additionally the all round design. The owner has to be a accurate talent when it comes to constructing websites.

  34. There is noticeably a bundle to learn about this. I suppose you made certain nice points in features also.

  35. Almost all news flash consumers these kinds of engages …. matter who essential there one can find somewhat published post on the warm theme, not even the full slurry growing media. Stick with it!

  36. But a smiling visitor here to share the love (:, btw outstanding describe. “Competition is a painful machine, on the contrary it produces vast results.” by Jerry Flint.

  37. click here says:

    Good Afternoon to every. My Group Is by Greece and employ a newer web page. Take A Look At my business site and tell me your advice. Yow Will Discover many good ideas and knowledge about my work. It’s no cost of charge 100% and without having registrator. With Thanks To every single who’ll see my new websites. This Will Aid my work. | πόρτες |

  38. of course like your website but you need to test the spelling on several of your posts. Several of them are rife with spelling problems and I to find it very bothersome to inform the reality then again I’ll surely come again again.

  39. I don’t commonly comment but I gotta state regards for the post on this amazing one :D.

  40. Hiya, I am really glad I’ve found this information. Nowadays bloggers publish only about gossips and internet and this is actually irritating. A good site with interesting content, this is what I need. Thanks for keeping this web-site, I’ll be visiting it. Do you do newsletters? Can not find it.

  41. Cher Nitzel says:

    My wife and i have been absolutely thrilled Ervin could finish off his inquiry by way of the ideas he gained through the web pages. It is now and again perplexing to simply always be releasing hints that people today have been selling. And we fully understand we now have the writer to be grateful to for that. The type of explanations you made, the simple web site navigation, the relationships you help create – it’s mostly wonderful, and it is making our son and our family recognize that that subject matter is interesting, which is especially mandatory. Thanks for all the pieces!

  42. Very good written post. It will be beneficial to everyone who utilizes it, including yours truly :). Keep doing what you are doing – for sure i will check out more posts.

  43. Tod Polisky says:

    Superior Early morning, I just stopped in to visit your web site and assumed I’d say I experienced myself.

  44. Hey! Do you know if they make any plugins to assist with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good results. If you know of any please share. Many thanks!

  45. Way too poor the Joint Commission International hospitals were being not included on this report!

  46. Hi, I think your blog might be having browser compatibility issues. When I look at your blog site in Safari, it looks fine but when opening in Internet Explorer, it has some overlapping. I just wanted to give you a quick heads up! Other then that, great blog!

  47. Omer Lichte says:

    This car just landed on Popular Meachanic’s record on the Ten Wimpiest Muscle Cars Ever. This is certainly what they wrote:

  48. Rodger Halyk says:

    i have the identical car, s line model. just had it mapped. serious torque mid range…

  49. Magen Carlye says:

    I do think Monty Python was driving this one particular.

  50. Usually I do not read post on blogs, however I would like to say that this write-up very forced me to take a look at and do so! Your writing style has been surprised me. Thanks, quite great post.

  51. I truly appreciate this post. I’ve been seeking everywhere for this! Thank God I discovered it on Google. You have got built my day! Thx once again…

  52. So, you will be lunching in Mansfield within the 30th (if I counted proper)? If I needed to drive up and meet you, how would I now where by to go?

  53. Romney must not talk to stephanopolis. That dude is in enjoy with 0bama, literally! when he interviews him he blushes._Romney needs to get tough and not move down. He had a presidential moment, when he allow 0bama have it right after the killing in the Ambassedor. Dont permit up on that..

  54. Madmily says:

    Wow, Thank you for this blog. Thats all I will say. You certainly have made this website into a thing thats eyesight opening and important. You plainly know a lot about the niche, youve covered numerous bases. Great stuff because of this part of the internet. Again, thank you just for this blog.

  55. I do not have any most favorite cards, but I do have most favored people! My faves are Ken Caminiti, Tony Gywnn, Joe Montana, Jerry Rice, Junior Seau, and LaDainian Tomilinson. That is quite a lot all I am able to consider of for now.

  56. suplementy says:

    I desired to be able to thank you for actually carrying out, intended for jogging this site. I prefer it often whenever understanding how to study, simply because innumerable other inspected by simply me personally are really biased. On account of you actually by some means have the ability to my family to travel university; )

  57. Thanks , I have immediately been probing for information approximately this topic for a long epoch and yours is the supreme I have came ahead accordingly a long way. Then again, what in regards to the bottom line? Are you positive regarding the source?

  58. Link says:

    I simply needed to appreciate you once again. I am not sure the things that I would have carried out in the absence of the suggestions provided by you relating to this industry. It seemed to be a horrifying dilemma for me personally, but finding out a new specialized strategy you processed it forced me to cry over happiness. I will be thankful for your service and then wish you find out what a great job that you are undertaking training many people via your site. I am sure you have never got to know any of us. Find Out More

  59. – yo , Thank you a whole lot for generating this website . I m into gambling niche and have identified this website utilizing search on google . Is going to be certain to share . I’m affiliate and have identified your site extremely informational Many thanks , see ya. :S

  60. My goodness. For someone who actually enjoys listening to both sides of a story, this string of comments made me feel physically ill. Although I may continue to visit this site for information, I will probably skip the comments from now on. In fact, I wouldnt be surprised to be compared to some despicable historical figure or be called terrorist-loving simply for stating my opinion.

  61. I seem to be the only one noticing that despite problems with the OC, OL, playcalling etc, the run game and Steelers O in general has been perfectly productive with MM in the backfield.

  62. solar panels says:

    Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.

  63. This is my first time I have visited here. I found a lot of interesting information in your blog. I guess I am not the only one who noticed this! keep up the impressive work. :p

  64. buybacks depend on the no. of share the shareholders holding , would they get returns on per share basis or is there any other scheme for buyback .

  65. Wow! This is a very nice post. Thanks for this.